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Inflation war ‘isn’t yet won’, RBA warns

Keeping rates on hold for a third straight meeting, the RBA governor gave few clues on when households could expect rate relief. Picture: NCA NewsWire / Jeremy Piper

The Reserve Bank has abandoned talk of further rate hikes, as it kept the official cash rate steady at 12-year high of 4.35 per cent.

In a decision that was widely expected by economists and markets, the central bank kept the cash rate on hold for a third straight meeting on Tuesday, as it awaits more evidence that a sharp downturn in inflation will continue.

But unlike previous statements, the board made no explicit mention of the possibility of an additional increase in interest rates, suggesting its aggressive run of 13 rate increases may have ended.

“The path of interest rates that will best ensure that inflation returns to target in a reasonable time frame remains uncertain and the board is not ruling anything in or out,” the statement read, in a pivot to a more neutral stance.

Governor Michele Bullock said the bank remained “vigilant” to ongoing inflationary pressures. Picture: NCA NewsWire / Jeremy Piper

The statement represents a softening of the guidance given at the RBA’s February meeting where it said “a further increase in interest rates cannot be ruled out”.


But speaking at a news conference following the decision, governor Michele Bullock downplayed the change in the statement.

“We have changed the language that’s true, but that was in response to some data, which has demonstrated to us that we are still broadly on the path we thought we were on,” Ms Bullock told reporters.

Ms Bullock added that while the central bank had made progress in its fight against inflation, the RBA was still not in a position to cut rates.

“What we need is greater confidence that inflation will return to the target band in a reasonable time frame and will stay there,” she said.

“The war isn’t yet one, so we continue to be vigilant.”

Westpac chief economist and former RBA assistant governor Luci Ellis said the board would “most likely remain on hold for a while”.

“What remains in the media release are the words of a central bank that is on hold, but not quite willing to say so outright,” Dr Ellis said.

“By saying it is not ruling anything in or out, the board is flagging the possibility that some shock could still derail the current trajectory of declining inflation and require a rate hike. But there is no sign of this occurring.”

‘Likely step’ towards rate cuts but services still sticky

Following the decision, rates traders pulled forward their bets of rate cuts, with markets implying a 96 per cent chance of easing to 4.1 per cent at the RBA’s August meeting.

AMP chief economist Shane Oliver agreed the RBA’s pivot to a neutral bias represented a “likely step” towards cutting rates.

“As the governor noted last month, it does not have to wait before inflation is actually back at target before starting to cut,” Dr Oliver said.

“Inflation is a lagging indicator and waiting till its back at target is likely a recipe for recession and inflation then falling below target.”

Data released since the RBA’s previous meeting in February have demonstrated a further cooling in the economy.

In January, Australia’s monthly inflation indicator eased to 3.4 per cent and the jobless rate rose to 4.1 per cent, while fresh GDP numbers showed the country’s economy expanded by just 0.2 per cent in the December quarter.

However, some economists have pointed to substantial wage increases, including in the aged care sector, and to stubborn services inflation could make future progress on reducing inflation difficult.

“Services inflation is still elevated, and that’s proving difficult to get down,” Ms Bullock warned.

HSBC chief economist Paul Bloxham said the increase in unit labour costs – the gulf between productivity and wages – was “far too high” to be consistent with the RBA’s inflation 2 to 3 per cent target.

“The challenge here is that, while wages growth lifting to around its current rate would not typically be worryingly high, it has coincided with dismal productivity outcomes in Australia,” Mr Bloxham said, who does not predict the bank will cut rates until 2025.

Reacting to the announcement, Treasurer Jim Chalmers hailed the decision as a reflection of the “good progress” made in taming inflation.

“It gives us confidence that inflation is moderating in welcome and encouraging wages,” Dr Chalmers told question time.

His opposition counterpart, Angus Taylor, said the decision would come as “cold comfort” for households.

“The reality is, Australians’ living standards have collapsed by thousands of dollars. This is money they will never get back, and there is no sign the government is committed to reversing this situation,” Mr Taylor said.

The RBA will release its latest financial stability review on Friday which will detail how household borrowers are weathering elevated interest rates.